IFRS are accounting standards used by international companies for financial management. They include income statement and balance sheet requirements, with specific rules for revenue, employee costs, taxes, inventory, and accounts receivable. Financial statements must follow IFRS guidance, with fair value accounting for assets, historical cost for PPE, and impairment adjustments for receivables.
International Financial Reporting Standards (IFRS) represent the evolving accounting standards and standards that international companies use when managing financial data. IFRS requirements are the individual rules or standards that a company must follow for certain financial activities. A simplistic breakdown for IFRS requirements is the separation of income statement standards and balance sheet activities. For example, these items may include revenue, employee costs, income taxes, and inventory items on the income statement: acquisition accounting; property, plant and equipment (PPE); inventory; and accounts receivable belong to the balance sheet. Other items are included in other IFRS rules or standards.
A financial statement is often the backbone of an accounting system, regardless of whether it follows national or international accounting standards. Common statements under IFRS requirements include the income statement or statement of comprehensive income, the balance sheet, the statement of changes in equity, and the statement of cash flows. Preparation methods must follow specific guidance in IFRS, although some variations may be possible. Each item reflected in these statements must meet the requirements of IFRS. Once a company selects a specific preparation method, it must continually use this method to maintain a trend for future use.
The individual IFRS requirements are actually quite detailed to review and understand; Here, a basic generalization of the requirements is presented. Income measurements must be at fair value when reported by a company; The correspondence principle applies here. Employee costs are recognizable once an individual completes service to a company for a specific task. Taxes are a liability that shows up on the balance sheet until paid; the related tax expense must be on the income statement for each month the company makes a profit or loss. Inventory costs follow the least-of-cost or market principle to recognize the cost of goods sold that reduces a company’s revenue over a given period.
On the balance sheet, IFRS requirements only allow the use of the purchase method for acquisition accounting and business combinations. When acquired, assets, both tangible and intangible, must follow fair value accounting requirements. PPE assets should go on a company’s books of account at historical cost, which is pretty standard for accounting practices. Depreciation of fixed assets and amortization of intangible assets are also part of these requirements. Inventory accounting must follow the same standards applied to the income statement; Accounts receivable accounting under IFRS requirements must follow historical cost principles and must then be written off or adjusted when any individual receivable becomes impaired or uncollectible.
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